PNC FINANCIAL SERVICES GROUP, INC. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Overall Performance: 2024 was strong with $6 billion earned, or $13.74 per share. Net interest income benefited from fixed asset repricing, fee income grew 6%, and record revenue was achieved. Operating leverage was positive due to expense discipline. Capital grew with tangible book value per share up 12% and $3 billion returned to shareholders.
• Business Segments: CNIB had record revenue and non-interest income in 2024 with sales and expansion markets growing 26% (over 60% non-credit). Retail banking saw consumer DDA growth at an 8-year high, PNC Investments had record brokerage revenue, and asset management group had strong positive net flows.
• Future Plans: 2025 plans include rolling out new online banking platform, doubling new branch builds in fast-growing regions, and entering the Salt Lake City market.
• Balance Sheet and Metrics: Loans were stable, investment securities increased, deposit balances grew. Tangible book value per common share was $95.33, CET1 ratio estimated at 10.5% as of December 31st.

Segment Performance

• Loans: Average loan balances were $319 billion, stable compared to the third quarter. Yield on total loans decreased 26 basis points to 5.87% in the fourth quarter. Commercial loans of $219 billion were stable with growth in CNIB and leasing balances offset by a $1 billion decline in commercial real estate loans.
• Investment Securities: Average investment securities of $144 billion increased $2 billion. The yield on the securities portfolio increased 9 basis points to 3.17%. The portfolio is 20% floating rate, up from 6% a year ago.
• Deposits: Average deposit balances grew $3 billion to $425 billion. Rate paid on interest-bearing deposits declined 29 basis points to 2.43% in the fourth quarter. Cumulative deposit beta through December was 47%.
• Income: Fourth quarter net income was $1.6 billion or $3.77 per share. Total revenue in the fourth quarter was $5.6 billion, up $135 million or 2%. Net interest income grew by $113 million or 3%, with a net interest margin of 2.75%, an increase of 11 basis points. Non-interest income of $2 billion increased 1%. Full-year revenue was $21.6 billion, a record, with non-interest income growing 6% offsetting lower net interest income.

Guidance

• Full-Year 2025: Expected net interest income to be up 6%-7%, non-interest income up approximately 5%, non-interest expense up approximately 1%, and effective tax rate approximately 19%. Spot loan growth expected to be 2%-3% (stable average full-year loans).
• First Quarter 2025: Expected average loans to be down approximately 1%; net interest income to be down 2%-3% (including impact of 2 fewer days in the quarter); fee income to be stable; other non-interest income in the range of $150 million to $200 million (excluding Visa activity); total revenue to be down 1%-2%; total non-interest expense to be down 2%-3%; first quarter net charge-offs to be approximately $300 million.

Risks

• Uncertainties regarding the outlook for the economy, interest rates, and the regulatory environment.
• Stress in the office commercial real estate portfolio with potential for additional charge-offs due to lack of demand for office properties and no stabilized market for property trades.
• Competition in the deposit market and potential challenges in gaining market share.

Q: Hi, good morning. I wanted to start off with a take on industry deposit growth and trends in '25. What are you guys seeing for the industry this year? And then maybe some comments on PNC's ability to gain some share in retail deposits, particularly as you start densifying some of the expansion markets.

A: Hi John, good morning. It's Rob. Yes, so on deposits, in terms of our outlook for '25, we do see growing deposits slightly 1% to 2% over the course of the year. We do expect some seasonality, though on commercial deposits where they'll go down a little bit in the first quarter and then grow from there. As far as our organic efforts in the expansion markets, things are going really well, and things continue along those lines. I'm sorry, Bill, the DDA growth that Bill talked about at the beginning bodes well for us.

Q: In terms of your response to Scott's question, based on the mechanics, you can approach that 3% as an exit rate for the year? Again, like I know you don't give a NIM guide but it seems like from a mechanical standpoint, that's what -- I just wanted to confirm that's what you are telling us. And in terms of the two cuts that you have embedded in your guide, I think a few folks have maybe one cut. Does that really matter if you have one cut or two in terms of your outlook for net interest income?

A: So the second question first. No, it doesn't. We're very neutral to rates, we've said that. So '25 is sort of locked in from a rate perspective. And then on your first question, yes confirmed, approaching 3% by the end of '25.

Q: Good morning. Just on the fee income side, I want to see if you can unpack the 5% growth outlook a bit for 2025, maybe just look at the most noteworthy drivers. I know you've talked about the capital markets opportunity quite a bit in the past as well as treasury and cash management and other areas. So if you could just help us and think about what are the largest drivers of that 5% outlook.

A: Yes. Sure, John. Just in the order of how we report our fees by categories for 2025, asset management, we would expect to be up mid-single digits, capital markets and advisories up mid-to-high single digits, card and treasury management up mid-to-high single digits, lending and deposit services up maybe low single digits. And then lastly mortgage, we expect to be off approximately 10% or even more. That's a small component but that's our best thinking at the moment.

Q: Hi Bill, I guess I've been asking this question for the last three or four calls, so I break the streak. Loan growth, so you're giving your NII guide assuming not much loan growth, just average, 0. And I know you're getting out of the forecasting business and so you just say it's basically 0 and here's your NII guide. And you're guiding for 400 basis points of operating leverage and that's that. Having said that, with all the caveats and the answers you gave before, what do you think is really happening? Is all the loan growth just going to debt capital markets or are the corporations just sluggish or what's going on?

A: It is not going to capital markets. I mean, there's a part of our book in the large corporate space where utilization has probably dropped more than most because of their ability to hit capital markets. But it's across all the subsegments from smaller commercial to middle market through to even our specialty businesses and asset-based finance, for whatever reason Mike, utilization is lower. And part of that's got to just be total cost. Part of it is got to be, we've been running into a lot of uncertainty, right? We've been calling for this landing for the better part of two years and people would like to have landed and got on with it, I think, before they invest a lot of capital. I think three quarters ago, if not four, we kind of said we're going to quit forecasting this. We don't need it. We showed you numbers to beat those numbers. And loan growth kind of ended up where we thought three or four quarters ago, which was not great. I don't know that it's going to be not great in '25. I just don't know what it's going to be. So you plug in any number that you want.